Taxpayer challenges IRS’ aggregation of two minority interests into one controlling interest for valuation purposes—In Estate of Epstein v. Commissioner, No. 11534-23 (T.C. 2023), the estate filed a petition challenging a $2.6 million tax deficiency, arguing that the IRS improperly combined limited partner (LP) and general partner (GP) interests when valuing an interest in an apartment complex for estate tax valuation purposes. On Jerry Epstein’s death, a marital trust created by his late wife held an 8.746% LP interest and a 1.2% GP interest, and a survivor’s trust held a 10.4% LP interest. The IRS valued the marital trust’s interests at a total of $15.59 million versus the estate’s value of $12.6 million, and the IRS valued the survivor’s trust interest at $16.4 million versus the estate’s $13.1 million, for a total difference of $6.29 million. Among other arguments, the estate claimed the IRS improperly aggregated the LP and GP interests in the two trusts to arrive at its valuation.
The IRS has lost on several attempts to aggregate two minority interests held in different capacities into one controlling interest and has now conceded the issue in the case of qualified terminable interest property (QTIP) marital trusts; that is, property passing to an individual’s estate isn’t aggregated, for estate tax valuation purposes, with property in a QTIP marital trust that’s included in such individual’s gross estate under IRC Section 2044. See Estate of Bright v. United States, 658 F.2d 999 (5th Cir. 1981); Estate of Bonner v. U.S., 84 F.3d 196 (5th Cir. 1996); Estate of Mellinger v. Comm’r, 112 T.C. 26 (1999); Estate of Nowell v. Comm’r, 77 T.C.M. 1239 (1999); Estate of Lopes v. Comm’r, 78 T.C.M. 46 (1999); and AOD-1999-006 (Aug. 30, 1999). The IRS has acquiesced to this line of cases.
The above courts noted that the surviving spouse doesn’t possess, control or have any power of disposition over the assets in the QTIP trust; that is, the surviving spouse’s estate didn’t have control over the trust assets “such that it could act as a hypothetical seller negotiating with buyers free of the handicaps associated with fractional undivided interests. The valuation of the assets should reflect that reality.” Estate of Bonner v. U.S., 84 F.3d 196, at p. 199. So it seems likely the Tax Court in Epstein will rule in favor of the estate on this claim.